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Four factors keeping investors nervous

TOKYO -- Global financial markets have been gyrating wildly since the beginning of the year, and the ride has been particularly wild since last week. Here, we examine what is keeping investors on edge.

     Short of a history-altering event, such as a military clash between Japan and China, the following four factors are probably behind investors' nervousness.

Default risk in China

The first factor is fear that the Chinese economy may decelerate sharply.

     One of the major causes of concern for the Chinese economy is the health of local government financing platforms, some of which are said to be facing imminent risks of default.

     Another potential problem is wealth-management products, which have gained popularity among Chinese investors since last year. A high proportion of the proceeds from sales of these products has been channeled to local government financing platforms.

     The immediate focus for now is whether China Credit Trust will be able to redeem on Jan. 31 the 3 billion yuan ($496 million) worth of financial products it sold through the Industrial and Commercial Bank of China.

     A default could undermine people's confidence in the financial system and spark a crisis in China. Given that country's influence on the global economy today, such a development would likely bring far-reaching negative consequences.

Enter Yellen

The second factor is the direction of U.S. monetary policy.

     Incoming U.S. Federal Reserve Chair Janet Yellen is a proponent of monetary easing. But she will face a new Federal Open Market Committee that includes influential people who are against the continuation of the easing -- Richard Fisher, the president and CEO of the Federal Reserve Bank of Dallas, and Charles Plosser, Fisher's counterpart at the Federal Reserve Bank of Philadelphia.

     Since the two have been working in the Federal Reserve system longer than Yellen, the future Fed chair has her work cut out for her managing FOMC meetings. Any comment by a committee member that is outside market expectations will rattle markets around the world.

     For now, investors are fixated on finding out if the FOMC will stick to its earlier decision to taper the quantitative easing program.

Japan tax hike

The third worrying factor for investors is how the planned increase in the consumption tax rate in April will impact the Japanese economy.

     Bank of Japan Gov. Haruhiko Kuroda told a news conference last week that he expected the impact to be limited. But there is no way of knowing for sure until that time.

     A plausible scenario is that investors will be taken on a roller-coaster ride as markets turn on a dime, reacting to sales and other consumption-related indexes. The fact that market participants have factored in further monetary easing by the BOJ makes the tug-of-war between the central bank and markets especially delicate.

Market turbulence

The fourth worrying factor is the seeds of chaos found within the markets themselves.

     The Chicago futures market, for example, has seen money continuing to pile into long Japanese stock positions and yen shorts. These positions pose no threat now while trends remain favorable. But things will change quickly if the market starts fluctuating wildly.

     Nervous investors may head for the door all at once by liquidating their positions. High-frequency traders and similar outfits may capitalize on these movements by buying yen and selling Japanese stocks.

     Once fears grip the markets, even a minor incident can cause wild movements. The sharp drop in U.S. stocks last week, for example, was probably caused by weakening Chinese economic indicators.

     The Argentine peso has plunged to a 12-year low, while the Turkish lira is languishing at its lowest level ever against the U.S. dollar. Behind these movements lie concerns that investors will pull money out of emerging markets as the U.S. tapers its quantitative easing program. The other side of this coin is U.S. Treasurys, gold, crude oil and the yen gaining popularity as safe-haven investments.

     The global economic recovery will probably not stall this year. But it will not hurt to closely analyze factors that could bring unexpected results. 

     In 1994, confusion reigned on global markets as the U.S. Federal Reserve began tightening its monetary policy. Studying what happened back then may be useful for investors looking for market clues for the coming year.

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